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The following materials answer many questions shareholders may have about the settlement trust PBC will propose for shareholder approval at the December 5, 2015 Annual Shareholders meeting. 

What is the relationship between these questions and answers and PBC’s proxy statement?

PBC’s proxy statement, along with a copy of the settlement trust and bylaws, has been sent to shareholders with the corporation’s proxy, proxy statement and annual meeting materials.  The proxy statement is the definitive statement by PBC describing the proposed settlement trust, and describes the nature and effect of the settlement trust more completely and accurately than can be provided in these questions and answers.  These answers have been simplified somewhat.  If there is any discrepancy between the proxy statement and these questions and answers, the proxy statement will control.

How can I get a copy of the settlement trust and bylaws?

The settlement trust and bylaws have been sent to all shareholders.  In addition, interested shareholders can get a copy of the settlement trust and bylaws by contacting the PBC office at (907) 277-1500.

What will the settlement trust be called?

The Pedro Bay Corporation Shareholder Trust.

Are settlement trusts legal?

Yes.  Trusts are legal under Alaska state law.  Settlement trusts were first authorized by ANCSA in 1988.

Have other Native corporations adopted settlement trusts?

Yes.  Since 1988, approximately two dozen Native corporations have created and funded settlement trusts. 

Who are the participants in a settlement trust?

The “settlor,” “grantor” or “trustor” creates the settlement trust and initially contributes assets to the settlement trust.  The “trustees” manage the settlement trust, similar to PBC’s board of directors.  The “beneficiaries” receive benefits provided by the settlement trust, somewhat like PBC shareholders.

What documents will establish the settlement trust?

The settlement trust will be created by two documents: a Trust Agreement and Bylaws.  A resolution adopted by the PBC board of directors authorizes creating the settlement trust, subject to obtaining shareholder approval.

What will be the relationship between PBC and the settlement trust?

PBC and the settlement trust will be closely affiliated, but will be separate legal entities.  PBC will contribute assets to the settlement trust, PBC directors will be a majority of all of the trustees, and PBC shareholders will be the settlement trust’s beneficiaries.  PBC approval must be obtained regarding some major decisions by the trustees, such as amending the bylaws.  PBC will provide administrative services to the settlement trust, such as maintaining its accounting records.  However, the settlement trust will own its own assets, the settlement trust will file its own tax return and pay its own taxes, and the trustees generally will make their own independent decisions regarding distributions and management of the settlement trust.  Unlike PBC subsidiaries, the assets, liabilities, income and expenses of the settlement trust will not be consolidated into the PBC financial statements and tax return.  The settlement trust and its assets will not be liable for PBC’s debts and obligations, and PBC will not be liable for the settlement trust’s debts and obligations.

Will creating the settlement trust affect PBC?

Assets contributed to the settlement trust will no longer be available to PBC. PBC will not be able to use the contributed assets to invest in new businesses or opportunities, or to support loans.  After PBC contributes assets to the settlement trust, PBC will not be able to distribute the assets to its shareholders and will not receive earnings on the assets.  This likely will reduce the income of PBC and distributions by PBC, but PBC expects that this will be offset by increased distributions the settlement trust will pay to its beneficiaries.  The PBC board of directors will take these impacts into account when it decides whether to contribute assets to the settlement trust, and what assets to contribute. 

What will be the settlement trust’s purpose?

As required by ANCSA, the purpose of a settlement trust will be to promote the health, education and welfare of Natives and to preserve the heritage and culture of Alaska Natives. The settlement trust will accomplish this by making distributions to its beneficiaries.

Will shareholders have to approve creating the settlement trust? 

Yes.  Shareholders owning a majority of the shares present at a shareholder meeting at which a quorum is present must vote in favor of creating the settlement trust.

Will shareholders have to approve PBC contributing assets to the settlement trust?

No.  That is a decision for the PBC board of directors to make.  Unless the PBC board of directors contributes a substantial portion of PBC’s assets to the settlement trust, it may from time to time make contributions to the settlement trust without the approval of the shareholders.

Will shareholders have to approve distributions by the settlement trust?

No.  That is a decision for the trustees to make.

Will the settlement trust’s business differ from PBC’s business?

The settlement trust is prohibited by law from operating as a business.  Therefore, the settlement trust will own and manage passive investments.  These investments may include owning a part of companies that are majority-owned and managed by PBC.  Also, settlement trusts are barred from transferring interests in land received from PBC except back to PBC. The settlement trust is barred from engaging in commercial timber harvest of PBC’s timber.  What constitutes “operating as a business” is not known, so the precise nature of the settlement trust’s activities is not presently known and will evolve with time.

Who will be the settlement trust’s beneficiaries?

All PBC shareholders will be beneficiaries, with beneficial interests proportionate to the number of shares owned.  For example, a PBC shareholder owning 200 shares will have twice the beneficial interest of a PBC owning 100 shares.  If a PBC shareholder gives away all of his PBC shares, he will cease to be a PBC shareholder and also will cease to be a beneficiary.  If someone receives (by gift or inheritance) some PBC shares, she will become a beneficiary based on the number of PBC shares received or owned.  A custodian for a child’s PBC shares will be treated as the custodian for the child’s beneficial interest.

Can PBC add new beneficiaries to the settlement trust?

If PBC amends its articles of incorporation, with shareholder approval, to issue PBC shares to Natives or descendants of Natives born after December 18, 1971, Natives who were eligible for enrollment but were not so enrolled, or Natives who have attained the age of 65, PBC may propose amending the settlement trust to include the new shareholders as beneficiaries.  The amendment must be approved by PBC’s shareholders.  PBC may propose such amendment to the settlement trust at the same time as, or within 18 months after, the shareholders approve issuing PBC shares to these new shareholders.  If PBC’s shareholders do not approve the amendment, the new shareholders would be PBC shareholders but would not be settlement trust beneficiaries.

Who will control or manage the settlement trust?

The trustees will be responsible managing the settlement trust.  This is similar to the board of directors being responsible managing PBC.  There will be between seven trustees, a majority of whom must also be PBC directors.  The bylaws initially provide that all seven PBC directors serve as trustees for the settlement trust, but this could change in the future.  For example, the board of directors could appoint professional investment advisers as trustees.  The PBC board of directors will appoint all trustees, and can remove them for cause.  The trustees will serve staggered three-year terms, like PBC’s board of directors.

How will the trustees make decisions?

Like the PBC board of directors, the trustees will act as a board.  A majority of the trustees must be present for there to be a quorum to act.  In general, a majority of all trustees must approve action by the board of trustees.  In contrast, in general only a majority of directors present at a PBC board of directors meeting is required for the board of directors to make decisions.  Decisions to recommend amending the settlement trust agreement, making a partial liquidation distribution or terminating the settlement trust must be approved by two-thirds of all of the trustees.

How will the trustees decide how much to distribute to the beneficiaries?

Each year the trustees will distribute to beneficiaries the maximum amount that can be distributed after protecting the settlement trust assets from the effects of inflation and setting aside reserves to even out fluctuations in the settlement trust’s value and income. The trustees will develop, with the assistance of financial experts, policies and procedures to achieve these goals. After the settlement trust has been in substantial operation for 10 years, the trustees can consider whether to make a special distribution in partial liquidation of settlement trust assets.

What will beneficiaries vote on?

If the trustees recommend amending the trust agreement, making a partial liquidation distribution or terminating the settlement trust, it must be approved by the beneficiaries.

How will beneficiaries vote?

The trustees will decide this, if a vote is necessary.  Because of the very limited issues that will be presented for vote, the trustees may specify some method of voting other than a meeting.  For example, the trustees may decide that the beneficiaries should vote by mail.  Beneficiaries owning a majority of all beneficial interests must approve matters submitted to a vote.

What fiduciary duties will the trustees have?

Trustees will owe a fiduciary duty to all beneficiaries.  The trust agreement requires each trustee to act “in good faith, solely in the interests of the Beneficiaries, and with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent investor, acting in a like capacity and familiar with such matters as a lay person and not an expert, would use in the conduct of an enterprise of a like character and with like aims.”  This “prudent investor” standard of care is more stringent than the legal standard of care applicable to PBC’s directors.  Like PBC directors, trustees may rely on advice for professionals, such as investment advisers, accountants and attorneys.  The trustees also may establish advisory committees.  Trustees who also are PBC directors also owe fiduciary duties to PBC’s shareholders.  It is possible but unlikely that a person’s duty as a PBC director will conflict with his duty as a settlement trust trustee.

Will the trustees be paid?

Trustees shall not receive compensation but can be reimbursed for their reasonable expenses in acting as a trustee, which reimbursement will be according to the same expense reimbursement policies that PBC uses for directors.

What officers will the settlement trust have?

The officers of the settlement trust will be: Chair, Vice Chair, Secretary and Manager.  The board of trustees will appoint the officers.

Will the directors, managers or employees of PBC get any special benefit from the settlement trust?

No.  Directors, managers and employees will participate as beneficiaries on the same terms as all other PBC shareholders, and their interests as beneficiaries will be proportional to their PBC shares.  Managers and employees of PBC who are not PBC shareholders are not eligible to be beneficiaries.  The settlement trust may not make loans to anyone, including directors, managers and employees.

What assets will the settlement trust own, and how will it manage them?

This will depend on what assets PBC’s board of directors decides to contribute to the settlement trust.  PBC may contribute cash and minority interests in PBC subsidiaries, among other assets.  The settlement trust will invest the cash and other assets and distribute to the beneficiaries a portion of the settlement trust’s income after protecting the value of the settlement trust assets.  In investing its assets, the trustees will invest its assets as a prudent investor would.

What assets will PBC contribute to the settlement trust?

This is up to the PBC board of directors to decide.  No decisions have been made. Initially, PBC will be conservative in making contributions to the settlement trust.  PBC likely will contribute cash that is not needed for ongoing operations. 

Are there any limits on the amount or types of assets PBC can contribute to the settlement trust?

The settlement trust cannot operate a business, engage in commercial harvest operations of contributed timber, or alienate interests in real estate received from PBC, so those types of assets will not be contributed to the settlement trust.  It is more likely that PBC will contribute cash and securities, may contribute equity interests in PBC subsidiaries.  Under state law, shareholder approval is required before PBC can transfer all or substantially all PBC assets to the settlement trust.  State law also would prohibit a transfer of assets to the settlement trust that would violate the PBC directors’ fiduciary duties, such as a transfer that renders PBC insolvent.

How will creating and funding a settlement trust affect the amount of distributions I receive?

The after-tax distributions of most shareholders should, over time, be larger. This is because the federal and state income tax paid on the settlement trust’s earnings and the distributions generally will be significantly less than the federal and state income tax paid by PBC and its shareholders on PBC’s income and distributions.  If the tax laws change (which is discussed below), this result could change.

The tax impact of the settlement trust is illustrated below.  This is an illustration, not a prediction.  Based on the following assumptions, the illustration shows that shareholder-beneficiaries would receive significantly more after-tax net distributions from a settlement trust than if PBC retained all assets and made distributions to its shareholders.  Here are the assumptions used in the illustration:

  • PBC has sufficient earnings and profits so that all of its distributions would be treated as taxable dividends

  • PBC either holds or contributes to the settlement trust $1 million, which generates $100,000 annual income

  • PBC or the settlement trust distributes to their shareholders/beneficiaries 90% of the annual after-tax income and retains 10% of the annual after-tax income for inflation-proofing, reserves and growth

  • Federal PBC income tax rate = 35%

  • Federal settlement trust income tax rate = 10%

  • State and local PBC income tax rate (net of credit on federal income tax) = 6.2%

  • State and local settlement trust income tax rate = 0%

  • Federal individual income tax rate = 16.0%

  • State and local individual income tax rate = 2.0% on corporate dividends, 0% on settlement trust distributions

    It is expected that PBC will continue to make distributions to its shareholders, depending on its profits each year.  This may go up and down.  If PBC has a very profitable year, it may make a large distribution.  If it suffers a loss or has a very small profit, it may not make any distribution.

    In contrast, the goal of the settlement trust is to make consistent distributions each year without regard to the profitability of PBC or the short-term profitability of the settlement trust. 

    Adding together the profit-based distributions from PBC and the investment-based, tax-free distributions from the settlement trust, the total distributions received each year by shareholder-beneficiaries should be more than if PBC retained all assets and invested them itself.

    Will being a beneficiary or receiving distributions from the settlement trust affect my government benefits?

    Being a beneficiary of a settlement trust may not be taken into account as an asset or resource in determining eligibility for food stamps, social security benefits or other federal financial assistance or benefits.  ANCSA provides that up to $2,000 per year per person of distributions from PBC are excluded from eligibility determinations.  It is uncertain whether this exclusion also applies to distributions by the settlement trust to its beneficiaries.

    Will contributions by PBC to the settlement trust be taxed?

    No, unless PBC contributes assets with untaxed appreciation.  As PBC identifies specific assets to contribute to the settlement trust, it may endeavor to select assets without significant untaxed appreciation.  If PBC contributes appreciated assets, it will need to recognize the gain and pay taxes on that gain.

    Will the settlement trust’s income be taxed?

    The settlement trust will earn income from its assets, such as interest and dividends.  The settlement trust will pay its own income tax.  PBC will not be liable for the settlement trust’s income tax.  The settlement trust will pay federal income tax at a 10% rate.  In comparison, PBC’s marginal federal income tax rate is 35%, and it pays additional Alaska income tax at an effective rate of 6.2%.  There is no income tax in Alaska on settlement trust income.  It is not known whether the settlement trust will have to pay state or local income tax in any other state.

    Will distributions I receive from the settlement trust be taxed?

    Distributions by the settlement trust of accumulated settlement trust income will be free of federal income tax for the beneficiaries.  In contrast, distributions by PBC from its current or accumulated earnings and profits are treated as taxable income for each shareholder.  States other than Alaska that have a personal income tax may or may not tax settlement trust distributions.  Partial liquidation of settlement trust assets will be treated as if they were made by PBC, so will be treated as taxable income to the extent PBC has current or accumulated earnings and profits and as a nontaxable return of basis to the extent it doesn’t have current or accumulated earnings and profits.

    Can I sell my interest in the settlement trust to someone?

    No.  The inalienability restrictions of ANCSA apply to transfer of beneficial interests in the settlement trust.  Also, state law “spendthrift” restrictions prohibit most transfers of a beneficial interest.

    Can I give my interest in the settlement trust to someone?

    If you give your PBC shares to a child or other person as permitted by ANCSA, the restrictions in the settlement trust would not apply.  Upon giving shares to your child, your child would become a PBC shareholder and therefore a settlement trust beneficiary.  If you give away all of your PBC shares, you will cease to be a PBC shareholder and also will cease to be a beneficiary.  You can give your shares and beneficial interest only to someone to whom ANCSA allows you to give your shares.  The same rules apply to transfer at death – whoever inherits your PBC shares when you die will also become a settlement trust beneficiary.  Your beneficial interest cannot be inherited separately from your PBC shares.

    Can a creditor seize my beneficial interest in the settlement trust?

    No.  The inalienability restrictions of ANCSA apply to most creditors attempting to seize beneficial interests in the settlement trust.  Also, state law “spendthrift” restrictions prohibit most creditor actions respecting a beneficial interest.  The exceptions for child support and, perhaps, IRS claims would apply to beneficial interest to the same degree that they apply to PBC shares.

    Can I sell or give away distributions from the settlement trust?

    After the trustees have declared a distribution but before it is paid, the ANCSA inalienability restriction should prevent most voluntary transfers of the distribution, but the state “spendthrift” restrictions may not prohibit such transfers.  After the distribution has been paid, neither the ANCSA inalienability restriction nor the state law “spendthrift” restrictions would prevent transfer of distributions actually received.

    Can a creditor seize distributions from the settlement trust?

    After the trustees have declared a distribution but before it is paid, the ANCSA inalienability restriction should prevent most creditors from seizing the distribution, but the state “spendthrift” restrictions may not prohibit such transfer.  After the distribution has been paid, the ANCSA inalienability restriction may prevent creditor action if you can clearly identify the seized funds as a settlement trust distribution.  The state law “spendthrift” restrictions would not prevent seizure of distributions actually received.

    How will distributions be paid among the beneficiaries?

    Distributions will be paid proportional to each beneficiary’s PBC shares, so a beneficiary owning 200 shares will receive twice as much distributions from the settlement trust as a beneficiary owning 100 shares.

    What will happen if a beneficiary doesn’t claim her distribution?

    The trustees can cancel distributions that aren’t claimed after five years, and either pay them among the beneficiaries or add them to the settlement trust assets.  If the beneficiary later contacts the settlement trust, the settlement trust may reinstate and pay the cancelled distributions on terms approved by the trustees.

    Do I have a right to be paid if I object to creating or funding a settlement trust?

    No.  Unless PBC contributes all or substantially all of its assets to the settlement trust, there are no “dissenter rights.”

    Can the settlement trust and bylaws be amended?

    Every five years, after the settlement trust has been in substantial operation for 10 years, the trustees can consider whether to amend the settlement trust.  In addition, the trustees may make technical amendments or amendments required by tax rulings without approval by the beneficiaries.  The trustees may amend the bylaws without approval by the beneficiaries, but the trustees will give PBC notice of the amendment before it becomes effective and PBC has the power to reject the amendment.

    Who will keep track of beneficiaries and do the bookkeeping for the settlement trust?

    PBC will provide administrative services for the settlement trust to identify and communicate with beneficiaries and account for settlement trust assets and distributions.

    How long will the settlement trust last?

    It could last forever.  However, if PBC does not contribute more than $1,000,000 in the first five years of the settlement trust, PBC may terminate the settlement trust.  This might happen, for example, if the PBC board of directors is not comfortable about the tax treatment of the settlement trust.  The trustees also may recommend that the settlement trust be terminated if it persuades a court that there has been a change to the applicable laws and regulations that seriously frustrate the purpose of the settlement trust, such as by imposing additional taxes on the settlement trust or beneficiaries.  Instead of seeking termination of the settlement trust, the trustees could request a court modify the settlement trust to avoid the adverse effect.  Also, every five years, after the settlement trust has been in substantial operation for 10 years, the trustees can consider whether to terminate the settlement trust.  Recommendations by the trustees to terminate the settlement trust must be approved by the beneficiaries.

    If the PBC shareholders vote to make PBC shares alienable, will this affect the trust?

    Yes.  The favorable tax treatment now available to the settlement trust will cease to be available.  The inalienability restrictions in the trust would still apply to beneficial interests even if the PBC shares can be alienated.

    What happens if the settlement trust terminates?

    After paying the settlement trust’s debts, all assets will be distributed to the beneficiaries.  No assets will be returned to PBC.

 


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